A Government Shutdown Could Delay Billions of Dollars in Tax Refunds

By Alex Rowell and Harry Stein
April 11, 2017, 9:00 am

Two key deadlines approach this month: Americans must file their taxes by April 18, and Congress and President Donald Trump must pass legislation to fund the government by April 28. If Congress and the president fail to act, the country will face a government shutdown. And in addition to countless other harmful effects—such as hundreds of thousands of furloughed employees, shuttered national parks, suspended medical research, and lack of access to important government services—the government shutdown could prevent millions of Americans from receiving a timely tax refund. The Center for American Progress estimates that a two-week government shutdown would hold up the tax refunds of roughly 2.5 million families, delaying nearly $8 billion in refunds.

There is already bipartisan legislation governing spending levels for fiscal year 2017, but President Trump wants to scrap that agreement. The Trump administration has requested that Congress cut domestic programs and international affairs spending by $18 billion in FY 2017, while increasing spending for defense, a border wall, and President Trump’s mass deportation agenda. According to TheDaily Caller, White House staffers have reportedly stated in private meetings that President Trump “is unafraid of a possible government shutdown” and is committed to funding the border wall—a nonstarter for Democrats. While congressional leaders in both parties are working on a bipartisan spending bill to avert a shutdown, any such legislation would require either the signature of President Trump or sufficient support to override a veto.

Even if Congress follows the spending levels set by the existing budget deal, a shutdown is still possible if the bill to fund the government includes controversial and partisan policy provisions, which are known as poison pill riders. In addition to a border wall, these include defunding Planned Parenthood, weakening safeguards for clean air and water, and repealing rules to stop Wall Street abuses.

At a time when the same political party controls the House of Representatives, the Senate, and the White House, a shutdown would be a shocking self-inflicted wound to the U.S. economy. And one consequence would be holding up tax refunds for millions of Americans.

The last government shutdown began on October 1, 2013, and lasted for 16 days. During this shutdown, more than 90 percent of workers were furloughed at the IRS. As a result, $2.2 billion worth of tax refunds to individuals were delayed. This was not the only impact of the shutdown at the IRS: Taxpayers were unable to receive tax help from in-person sites or by phone, the IRS could not verify incomes for people attempting to buy a house or get a loan, and $1.5 billion in refunds to businesses were delayed.

With this potential shutdown starting on April 29, soon after the 2017 deadline for tax filing, even more taxpayers could be affected. Based on the number and value of refunds issued during the same period in 2016, CAP estimates that nearly $8 billion in individual income tax refunds would be delayed in the event of a two-week government shutdown.* This would affect 2.5 million families who would otherwise be receiving a refund during those weeks. Using the latest IRS data on how tax refunds are distributed across states, CAP provides estimated state-by-state impacts in Table 1 below. This analysis assumes that the IRS halts tax refunds in this potential government shutdown, as it did during the previous shutdown.

Every tax refund that is delayed has the potential to throw family budgets into turmoil. According to a Bankrate.com poll, 30 percent of taxpayers who expect a tax refund plan to use it to “pay down debt,” and another 26 percent plan to “spend it on necessities.” The government owes this money to taxpayers, and delaying tax refunds is just one example of how lawmakers would be failing to do their jobs in the event of a government shutdown.

Congress and the White House should come together and fund the government in a clean bill without harmful policy riders. If they fail to do so, the United States will face a harmful government shutdown and millions of people will be left waiting for their tax refunds.

* Methodology: We estimate the number and value of refunds affected by a two-week government shutdown by calculating the total number of refunds and value of refunds issued during the equivalent time period, April 29 to May 13, using IRS statistics for 2016. We assume that the total number and value of refunds issued from April 29 to May 13 in 2016 would be the same as the number issued during the same period in 2017. To estimate refunds at the state level, we multiply these aggregate numbers—2.525 million refunds worth a total of $7.829 billion—by the share of returns with refunds and the value of refunds by state in tax year 2014, the most recent year for which state data are available from the IRS.

Alex Rowell is a Research Associate with the Economic Policy team at the Center for American Progress. Harry Stein is the Director of Fiscal Policy at the Center.